IMF outlook on G-20 fiscal balances and debt

Sunday, March 8, 2009

With countries around the world jointly fighting severe economic contractions, financial crises, and commodity price deflation, the outlook regarding public finance is dim into the medium term. The International Monetary Fund (IMF) released a report that looks at public finance over the short-term and medium-term for the G-20, The State of Public Finances: Outlook and Medium-Term Policies After the 2008 Crisis (the .pdf is available here).

This is a nice paper that sums up some issues regarding debt versus fiscal deficits. A first important feature of this recession, is that its severity (the huge output gap and rising unemplyoment rate) is one primary cause of the budgetary stress (deficits and rising debt) - rising unemployment insurance payments, social transfers, and falling tax revenues. The fiscal stimulus measures and response to the financial crisis simply add further stress to the fiscal budget, but likely mitigate the recession, and therefore further automatic spending.

And second, deficits usually fall during the recovery period, as the macroeconomy improves, stabilizing spending falls, and temporary stimulus measures wear off. However, debts must be actively paid off in the longer term.

The short-term fiscal outlook

The advanced G-20 fiscal deficits are expected to reach 8% of GDP on average in 2009, a 6% increase since 2007. The debt-GDP ratio is expected to rise another 14.5% as a share of GDP.

And the near-term impact of the economic crisis (recession) shows that automatic stabilizers will contribute a sizable share to rising deficits, alongside discretionary spending and financial aid.

The medium-term fiscal outlook

Fiscal imbalances are expected to improve, but may remain above pre-crisis levels. The deficits will fall due to the following: (1) improved macroeconomic conditions, (2) temporary stimulus measures wear off, (3) possible tightening measures like further reduced spending and/or tax hikes. However, debt-to-GDP ratios are expected to remain elevated, and in the U.S., debt is expected to rise to 99.5% of GDP.

That is only in the baseline scenario (page 21). The projection worsens markedly if growth is 1% below the baseline in 2009-2011, or if the G-20 experienced a Japan-style prolonged economic slump (growth falls 2% below the baseline 2009-2013).

Looks bad. But remember, so is this recession. And much of the debt accumulation (page 25) and deficit spending will be in direct response to the size and severity of the recession.

Overall the risks are great, and the outlook regarding debt growth across the G-20 is rather bleak. The IMF notes that rising government debt does not imply fiscal insolvency, as many countries will find ways to reduce the debt. However, it cannot be ignored, and must be addressed in expansion years.

Rebecca Wilder


Smack MacDougal March 8, 2009 at 5:46 PM  

Rebecca, thanks again for peeling away another layer of the many fallacies of Academia Economics.

Your blog does wonders for others to see what is happening.

On budgets

"budgetary stress" is euphemistic rhetoric.

The sole cause of budget problems is overspending done by politicians.

For if no problem existed, every fiscal year, revenue would equal expenditure.

Yet this never happens. Each fiscal year, spending exceeds revenue. Thus, overspending happens.

Why? No law or force prevents politicians from borrowing through issuing government debt.

No such thing as "falling tax revenues" exists.

Collected revenues are what they are.

In any fiscal year, the sum of collected revenues exists because existing law allows for the exact amount of collection.

If politicians don't collect as much as they believed they could, the failing is their false beliefs, their lack of knowing what any future would arise based on the existing law and the existing want of men to transact with each other.

Deficits rise and fall irrespective of the state of economy. A deficit is a function overspending relative to the legal allowed collection of revenue.

If politicians continue to overspend during a recovery, deficits can increase in magnitude.

This happened before.

This kind of idiocy "budgetary stress" is the exact kind of foolery that continues to expose Academia Economics as the bogus science that it is.

On Bogus Analysis

A meaningless exercise happens when someone sums up data for countries, e.g., "The G20".

Each country has its own economy that arises from its own set of laws, money in circulation (notes and coins), credit money, tax laws, product laws, spending budgets at various government levels, more.

Once someone adds up the various economic data, countries with bigger magnitudes skew the data.

While some of the G20 members are Eurozone countries, this does not undermine truth that each has their own economy based on laws that govern transaction.

On Propaganda

Whether you intended it or not, your latest blog post amounts to apologist propaganda for reckless political action.

Such political action continues to burden citizens of countries with outrageous debt.

Worse, the sole source of the economic collapse are the Political Class.

After all, these men and women set the laws for economic transaction as well as grant the charter monopolies for the manufacture and distribution of money and credit money (Federal Reserve in the U.S.A., ECB in the E.U.).

Shopkeepers and workers everywhere interact only within the confines of the rules, the system as it exists, designed by the Political Elite.

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